The Economy Isn't As Bad As You Think: Zandi's 2022 Outlook

Zandi makes some critical assumptions about the marketplace that are worth probing by this audience.  He is correct that inflation is not inevitable.   He likes to talk about supply and demand.   Yet, the vulnerability of his analysis is that to-date the monetary authorities have not sought to approximate interest rate pricing that would be generated by the forces of supply and demand.   With negative real interest rates that occur when interest rates are less than inflation, the incentives are problematic in fanning the flames of inflation.  Zandi seems to ignore that the growth of debt markets has clearly been driven by borrowings via policy-dictated low interest rates rather than a free market.  Low interest rates have driven dramatic increases the volume of fixed income securities.  https://www.sifma.org/resources/research/fixed-income-chart/ 

Meanwhile, where are the people who earnestly want to lock in 30-year yields below 2%?   The assertion that investors are "putting their money where their mouth is" causes suspicion.  I have not met one person who would like to lock up their life savings at rates below 2% for decades.  We have money managers today (who have never lived and operated in the world of material inflation) who have seen success in betting that economic stress always leads to gains in long term bonds.  Inflation changes this calculus.  How could we expect today's money managers to properly calibrate this?  Thanks for a glimpse into how one influential economist is rationalizing the comments that we have been hearing from the government.

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Neil Stanley
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Original Message:
Sent: 12-14-2021 13:29
From: Barb Rehm
Subject: The Economy Isn't As Bad As You Think: Zandi's 2022 Outlook

Listen to the latest episode of Banking with Interest. While much of the economic data is relatively strong, consumers remain pessimistic about the economy, with fears about inflation rapidly rising. Mark Zandi, the Chief Economist at Moody's Analytics, goes through the latest data to answer critical questions about the economy headed into the New Year. How worried should we be about inflation? What will the Fed do next? Will the omicron variant cripple the economy just as it seems about to recover?

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Barb Rehm
Senior Managing Director
IntraFi Network
Arlington VA
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